The Federal Board of Revenue (FBR) is seriously examining a budget proposal of the Securities and Exchange Commission of Pakistan (SECP) to amend the Income Tax Ordinance 2001 to clarify the provision as a result of proposed changes in the Accounting Regulations contained in the Securities and Exchange Commission [Insurance] Rules 2002.
Sources told Business Recorder here on Friday that the FBR has considered the proposal of the SECP. It is a tax-neutral proposal, which is being examined by the tax authorities for incorporation in the Finance Act 2011. According to the SECP proposal, the life insurance companies are required to produce two sets of financial statements, the formats for these being prescribed under the Securities and Exchange Commission Insurance Rules 2002. Presently, both the Regulatory Returns and Published Financial Statements consist of similar statements including a profit and loss account. There is a current initiative, however, under the auspices of an Insurance Committee of the Institute of Chartered Accountants of Pakistan to modify the contents of the Published Financial Statements so as to produce a single statement of Comprehensive Income instead of two separate statements for the shareholders' fund (Profit and Loss Account) and Statutory Funds (Revenue Accounts). As a result it is necessary to clarify, in order to avoid confusion, that the reference to "profit and loss account" in Rule 2 of the Fourth Schedule of the Income Tax Ordinance 2001 relates to the statement required to be produced under Section 46(1)(a)(ii) of the Insurance Ordinance 2000, SECP added.
As per existing provision of Rule 2 of the Fourth Schedule under the Income Tax Ordinance 2001: "The profits and gains of a life insurance business shall be the current year's surplus appropriated to profit and loss account prepared under the Insurance Ordinance 2000 (XXXIX of 2000), as per advice of the Appointed Actuary, net of adjustments under Sections 22(8), 23(8) and 23(11) of the Insurance Ordinance 2000 (XXXIX of 2000) so as to exclude from it any expenditure which is, under the provisions of Part IV of Chapter III, allowed as a deduction in computing profits and gains of a business to the extent of the proportion of surplus not distributed to policyholders".
The SECP has proposed to replace this provision by the following: "The profits and gains of a life insurance business shall be the current year's surplus appropriated to the Shareholders' Fund as disclosed in the profit and loss account prepared under Section 46(1)(a)(ii) of the Insurance Ordinance 2000 (XXXIX of 2000), as per advice of the Appointed Actuary, net of adjustments under Sections 22(8), 23(8) and 23(11) of the Insurance Ordinance 2000 (XXXIX of 2000) so as to exclude from it any expenditure other than expenditure which is, under the provisions of Part IV of Chapter III, allowed as a deduction in computing profits and gains of a business to the extent of the proportion of surplus not distributed to policyholders".
For the purpose of this Rule any surplus arising in the Statutory Funds set up under Section 14 of the Insurance Ordinance 2000 (XXXIX of 2000) shall not be considered except to the extent that it is transferred to the Shareholders' Fund and disclosed in the profit and loss account, the proposed amendment added.